How $750k Can Go as Far as $1 Million in Retirement

Would you rather have $750,000 or $1 million? On its face, this question seems like a no-brainer. One million dollars is a larger number than $750,000, so that has to be the correct answer – right?

What if we asked the question in another way. Would you rather have $1 million in a traditional IRA, or $750,000, evenly distributed between a taxable brokerage account, a traditional IRA, and a Roth IRA? Now this question becomes a bit more challenging to answer.

Retiring with $1 Million

In a recent video about retiring with $1 million, we discussed four hypothetical retired couples:

Average Couple: Saved $1 million in traditional IRAs
Investing Couple: Saved $1 million in a taxable brokerage account
Ideal Couple: $1 million saved between a brokerage account, a traditional IRA, and a Roth IRA.
Unicorn Couple: Saved $1 million in Roth IRAs

All four couples had the same Social Security benefits.

Based on the same life expectancies, the first couple was able to spend $84,000 per year throughout their retirement, the second couple was able to spend $86,500, the third was able to spend $91,500, and the fourth, $95,500. We were trying to illustrate the difference between the types of investment accounts available to individuals. We’ve previously written about the difference between traditional and Roth investment accounts.

Granted, if someone had saved $1 million to a traditional IRA over their lifetime, they would likely have received lots of tax deductions over the years. However, compare them to someone who had accumulated $1 million in a Roth IRA. They would have likely missed out on those same tax deductions because contributions to a Roth IRA are not tax-deductible.

How $750k Can Go as Far as $1 Million in Retirement - Lifetime Income Retiring with $1 Million

GRAPHIC 1 – Download the Full Graphic Here

Nonetheless, the point stands that four couples with the same earnings history and the same Social Security benefits, all with $1 million saved in various types of investments accounts, would likely have drastically different retirements. In large part due to each couples’ tax situation, as you can see in the graphic above.

So, How Can $750k Go as Far as $1 Million in Retirement?

We wanted to take this case study one step further once we reviewed the data. Using our same assumptions for the first case study, what if we added a fifth couple. The fifth couple had “only” accumulated $750,000, but, like the ideal couple, they saved their money between a taxable account, a traditional IRA, and a Roth IRA. And using the same 80% confidence score in our Monte Carlo trial to solve the amount of annual, after-tax spendable income this couple could have. The results were interesting.

How $750k Can Go as Far as $1 Million in Retirement - Average Couple versus Ideal with 750k

GRAPHIC 2

What we found was this fifth couple was able to spend $84,000 per year throughout their retirement. The interesting thing about that number is it is the same amount of after-tax spendable income as the couple who retired with $1 million in a traditional IRA. Over a lifetime, this equates to $3,505,168.

So the next time someone asks you what seems like a loaded question: Would you rather have $750,000 or $1 million? Be sure to ask a follow-up question: What type of account is the money held in? If they look at you like you’re crazy, be sure to forward them this post!

If you want to understand how you can employ strategies like this, schedule a complimentary consultation below. Or give us a call at (913) 393-1000. We’re happy to help.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.